The Zimbabwe bond note survives

ZIMBABWE'S surrogate bond note currency will continue to circulate as Treasury says it will maintain the 1:1 parity between local money and the greenback. This is despite the disparity in exchange rate that has wreaked havoc in the economy and is largely responsible for the wanton price hikes.

According to most analysts, clarity on the currency was the most pressing issue that Finance minister Mthuli Ncube had to address as the status quo gave birth to multiple pricing of goods and services as producers sought to leverage against possible devaluation.

United Kingdom-based financial services firm, Fitch Solutions warned prior to the budget that as long as the current currency regime remained, "constraints including higher-than-reported levels of inflation and businesses' inability to access imports would constrain economic activity."

This was due to the fact that local currency in the form of electronic money and bond notes was not adequately being ring-fenced by actual foreign currency.

"From this multi-currency basket, the US dollar is our reference currency, also applying to the 2019 National Budget. Government commits to preserving the value of money balances on the current rate of exchange of 1 to 1, in order to protect people's savings and balance sheets," Ncube said in his maiden National Budget for 2019 presented in Parliament yesterday.

Typically, countries that use the US dollar such as Ecuador and Panama enjoy significant amounts of trading with the United States.

Zimbabwe's trade with the United States is low, but enjoys an over $2 billion worth of annual trading with South Africa, leading to many analysts asking the government to consider using the rand as the anchor currency.

"Going forward, the objective is to build foreign reserves and credit lines, as part of the strategy for the value preservation objective. Furthermore, it is important to note that, this value preservation arrangement is hinged on consistent implementation of prudent fiscal and monetary policies, as well as disciplined market conduct by all economic agents as espoused in the Transitional Stabilisation Programme," Ncube said.

"There has been an upsurge in inflationary pressures during the third quarter of the year. This has been driven mainly by food prices which were responding to rising parallel exchange premiums, panic buying and artificial shortages.

"The upsurge in inflation is, however, a phenomenon arising from fiscal imbalances that have fuelled money supply."

Ncube said the increased supply of goods following the scraping of Statutory Instrument 122 that regulated the importation of over 40 goods, would see stability in the foreign exchange market.

Treasury expects to build enough foreign currency reserves that will see the annual inflation drop to 5% by the end of 2019.

But Zimbabwe is not generating significant foreign currency earnings, leaving the central bank unable to meet demand from an import-oriented market.

"As macro-fiscal consolidation progresses, government will establish a strong inclusive framework, through an interim foreign currency allocation committee, with broader representation as was the case in the past," Ncube said.

He, however, said government will gradually exit from exchange controls to market-based mechanisms that promote efficiency in foreign currency allocation.